This is a good question to know the answer to:
A substantial portion of the valuation of early stage startups is not their user/engagement/revenue numbers, it is the discounted value of the uncertainty of growth of those numbers until future checkpoints.
This decays over time.
One of the structural reasons for pivots is that pivots present an argument for refilling the uncertainty bucket which has been drained by thoroughly investigating the pre-pivot opportunity and finding it did not conceal a huge amount of value.
A thing which is obvious but probably confounding to people outside of the ecosystem:
“Two kids with a gleam in their eye” (I.e. no indicia of progress) can produce a company with immediate implicit valuation far in excess of e.g. operating, profitable businesses that I sold.
This is because they’re selling uncertainty and I sold cash flows.
I could sell uncertainty, too, and market prices for it are market prices but I’d speculate with high confidence that it is worth rather more than that of the notional “two kids.”
A lot of the angst about startup valuations is a commingled business and aesthetic judgement that professional investors are overpricing uncertainty and that this overpricing carries with it a moral claim that the uncertainty is “worth more” than other businesses/other pursuits.
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